Question

A perfectly competitive market with the following demand and supply conditions:

QD = 14,000 – 1,500P

QS = -6,000 + 1,000P

(a) Find the equilibrium price P and quantity Q in this market.

(b) If there are 50 identical firms in this market, how much is each firm producing (q)? How much profit is each firm making?   q = _______; profit = _______;

(c) Suppose that demand in the market shifts to QD’ = 16,500 – 1,500P. What is the new market equilibrium price and quantity? P = ______; Q = _______; q = _____

(d) In the short run (before new firms can enter), how many units will each firm produce now? How much economic profit is each firm making with the new market demand? (For simplicity, suppose that the marginal and average costs for each firm remain constant at the level from part a.)

e) Explain what will happen to firm output and economic profits as the market adjusts to long run equilibrium, with new firms entering. How much total output will be sold in the long run? If each firm returns to making its original output, how many firms will there be in the market now?

 

Answer 1

a) equilbrium price and quanitty at QD =QS

14,000 – 1,500P = -6,000 + 1,000P

2500P = 20000

P = $8

Q= 14000 - 1500 *8

Q= 2000

b) if there are 50 firms in the market then, each firm produce = 2000 / 50 = 40

so each firm produce 40 units of output

and profit of each firm = 40 * 8 = $320.

c) QD' = 16,500 – 1,500P

QD = QS

16,500 – 1,500P = -6,000 + 1,000P

2500 P = 22500

P = $9

Q = 16500 - 1500* 9

Q = 3000

d) existing firm will produce now = 3000 /50 = 60

each firm profit = 60 * 9 = $540

e) the firm output will reduce and economics profits will return to zero because in the long run new firms enter the industry.

the firm total output will be sold to the original equilbruim output that is each firm will start againt producing 40 units. then again there will be only 50 firms in the market because in the long run, all firms earning zero profit and no firm will in the market if they having losses.